What Prada Gained, and Lost, by Listing in Hong Kong

Prada may now be closer to China than any other European luxury brand: it is listed in Hong Kong, it makes a large share of its goods in China, and Chinese shoppers are among its most important customers.

By 2015, Prada had been in China for more than a decade. It is currently restoring an old villa in Shanghai. The house, on North Shaanxi Road, was once home to the Rong brothers, two of modern China's great merchants.

Built in 1918, the freestanding three-story Western-style house is one of the best-preserved garden villas in Shanghai. Once the restoration is finished, Prada may move its offices there from Plaza 66, the Shanghai mall where luxury brands cluster.

Luxury brands that arrive in Shanghai love to hunt for old villas. Patek Philippe has settled into "Yuandi" on the Bund. Richemont holds a pair of twin villas on Huaihai Road, and Hermès has carefully converted an old mansion on the same road into the "Maison Hermès." By doing the same, Prada lends itself a little more aristocratic polish.

Prada in China (Source: Reuters)

In China, Prada never lacks for talking points: complaints about its product quality, its CEO's fiery temper, its aggressive store sales tactics and its executive turnover. Prada may now be closer to China than any other European luxury brand: it is listed in Hong Kong, it makes a large share of its goods in China, and Chinese shoppers are among its most important customers.

"I really love this country. I first came to China in the 1980s, and I was amazed to find huge changes here every year. Chinese people already understand what fashion means," Miuccia Prada told WWD in a 2011 interview. That year, Prada finally became a Hong Kong-listed company, after four failed attempts to list in Europe.

Right now, though, Prada is having a hard time. In fiscal 2014, net profit across its global business fell 28% to 450 million euros. Sales in Asia-Pacific, which accounts for 36% of the total and has always been Prada's most important market, fell 3% that year, and Prada had to slow its pace of store openings in China.

And Prada's problems in China go further than that.

On a scorching midsummer afternoon two years ago, in Shanghai's Tianzifang, Li Na, a luxury-goods authenticator with short blond hair, was teaching a class in an art space with steel pipes exposed in the ceiling.

"What's special about this logo?" Li Na asked her audience of more than 30 young, fashionable women. A projector threw an image onto the white wall: the inverted-triangle PRADA nameplate that everyone knows.

The audience looked puzzled. Li Na pointed at the logo's second letter, the "R." "See the small notch in the middle? On new products from the past few years, the 'R' is 'cut open.' If it isn't, it's a fake."

The audience was stunned. Prada had done something unexpected to its own logo, much like the short films it makes: bold, and a little eerie.

Compared with some European luxury brands, Prada may indeed run a greater risk of being knocked off in China. It works closely with a number of Chinese contract manufacturers, so counterfeiters can get closer to the production process.

Fakes aside, Prada has also run into plenty of trouble on social media, and most of the complaints are about product quality. Some joke that if your Prada handbag or sunglasses have lasted a long time without breaking, they are probably fake, because the real thing would most likely have cracked or broken by now.

These complaints have a cause: a sharp rise in output.

Prada listed in Hong Kong in 2011. Its sales were 2.56 billion euros in fiscal 2011 and jumped 29% to 3.3 billion euros in fiscal 2012. They stayed at that level for the next few years, which means Prada went through a period of sharply higher output after it listed.

As a listed company, Prada began to face tough questioning from analysts, and "being accountable to investors" and "meeting expectations" became important tasks. To perform well in the capital markets, a company has to deliver fast growth, and a faster production pace seems almost inevitable.

In Dongguan, Guangdong, there is a company called "Dongguan Prada Trading Co., Ltd." It appears in Prada's financial reports as a directly held subsidiary, and it supervises Prada's contract factories across Guangdong. A large number of these factories, spread across Dongguan, Shenzhen and Zhongshan, make handbags and shoes for Prada while also producing for other brands. One of them is the Hong Kong-listed leather goods maker Shidai Piju.

After the Hong Kong listing, Prada began to publish financial reports on a regular schedule, and at almost exactly that time its top executives began to treat output and sales volume as targets.

"More output means more goods in the stores, more goods in the stores means better results, and they keep pushing the pressure down the line," said a person inside Prada. Craftspeople who make bags against a tight deadline may get sloppy, and quality problems become more likely.

In May 2011, Goldman Sachs, the sponsor of Prada's listing, wrote in a report that Prada's 11 manufacturing units produced only about 20% of its finished goods, and the rest was outsourced. At the time, Prada worked with 450 raw-material suppliers and 480 manufacturers, and employed 170 quality inspectors. Goldman Sachs saw this as a major quality risk.

Patrizio Bertelli, Prada's CEO, has clearly noticed, and he keeps reshuffling Prada's management.

His temper is famous. According to one report, while inspecting a Miu Miu store in New York, he suddenly grabbed something and smashed a mirror on the spot, because it made people look fat.

Executive turnover is nothing new at Prada. Its first annual report after the listing already showed that several executives, including the chief operating officer, had been quickly replaced. Prada employees told foreign media that the revolving door was mainly the result of Bertelli's temper.

According to people inside Prada, more than one key executive has left over the past year, and the departures were linked to product quality. Among those who left were veterans who had worked alongside the boss for many years.

A QDaily reporter compared Prada's annual reports for fiscal 2013 and fiscal 2014. Each contains a list of the company's "senior management." Five executives listed in the 2013 report no longer appear in the 2014 report.

The fiscal 2013 report introduced the executives who later vanished from the list like this: Giuliano GIANNESSI, 50, group chief financial officer since 1993; Janice LAM, 43, general manager of Prada China since 2013; Lorenzo PANERAI, 46, head of the leather goods production division since July 2008...

Those who left include the China general manager and the head of the leather goods division. China is an important production base, and leather goods are where the quality problems are worst.

According to people inside Prada, Bertelli now oversees product quality himself. He gives orders directly to regional managers and checks every stage of quality control. His demands are exacting, and the whole company walks on eggshells. Even the contract factories far away in Dongguan know that if a single batch has quality problems, they may be dropped.

Patrizio Bertelli at work

In fact, the biggest quality risk is not in China. Because labor costs less in China than in Italy, every product made in China is inspected by hand, while in Italy only spot checks are possible. As a result, Prada goods made in China are actually of better quality than those Made in Italy. Of the Prada handbags sent back for repair each year because of quality problems, a far higher share were made in Italy than in China.

Under the pressure to produce more, the problems on the Chinese and Italian production lines differ.

Many luxury brands use their brand power and order volumes to squeeze the prices they pay contract factories, and Bertelli seems to have realized that this invites corner-cutting. Prada recently raised what it pays contract factories and required them to specialize: factories that make clothing no longer make handbags on the side, and factories that make handbags do not take on other product lines.

Once spending on quality goes up, the money has to be saved somewhere else. Prada used to ship its products by fast but expensive air freight; now most go by cheap sea freight. To limit the delay in getting goods onto shelves, every department has to plan further ahead.

The hot-tempered Bertelli is using a heavy hand to try to pull Prada, which has drifted somewhat out of control since the listing, back up to the standard it should meet.

Miranda (a pseudonym) once managed a Prada store and was later promoted, but she did not stay.

For a time, whenever Miranda arrived at the store, she had to compare her clock-in time with her colleagues'. Even a one-minute difference counted: staff were ranked and numbered by arrival, then served the day's customers in that order. The point was to stop sales staff from fighting over big spenders or picking and choosing customers, ignoring those who didn't look glamorous enough.

Prada's sales staff may be every bit as tough as their boss.

Prada registered its first company in China in 2005, but its products were clearly coming in earlier. Many luxury brands first entered the mainland market through agents in Hong Kong, but Prada has released no official information on this.

After the listing, Prada added 18, 15, 27 and 15 new stores in Asia-Pacific in 2011, 2012, 2013 and 2014 respectively. Some stores opened and some closed, but the overall trend was expansion.

And Prada's stores are the most controversial subject in the industry.

"It's complicated inside, and it's hard to survive," sighed Jason (a pseudonym), who has worked in luxury retail for nearly ten years. Prada puts great weight on unlocking individual potential and does not encourage teamwork.

When you walk into a luxury store, elegantly dressed, carefully made-up staff come over to serve you. More than one may talk with you: one helps you try things on, another hurries to the stockroom to find a size that fits you better... You feel thoroughly pampered.

At most luxury brands, a salesperson is rewarded with a commission whether they sell an item directly or help a colleague make the sale. The company rewards individual ability and also recognizes teamwork; brands differ only in the formulas they use.

Prada plays a very different game. In its early years, Prada reportedly gave almost no reward for teamwork: only the salesperson who wrote up the sale got a share of the bonus. From front-line staff to fairly senior employees, rewarding the individual has always been Prada's approach. To especially strong candidates, Prada promises in recruiting that their pay will have "no ceiling."

A few years ago, a front-line salesperson at Prada earned a base salary of only a little over 1,000 yuan a month, against about 2,500 yuan at other brands. But Prada paid far more commission than its peers: a top performer could take home 20,000-30,000 yuan a month.

A policy like this points everything staff do toward selling, and they have no reason to do the large amount of "non-sales work" that every store needs, such as tidying the stockroom.

Yet a sale is never closed by one employee alone; teamwork is indispensable. Prada's harsh, high-stakes sales system unlocked individual potential and built a ferocious sales team, but it made relations between employees fraught. Staff are under heavy pressure, and turnover is high.

Emmanuel Hemmerle, a Shanghai-based French consultant to the luxury industry, told QDaily: "Prada's salespeople are tougher than any other brand's. But because the brand puts individual contribution above everything, with a clear focus on 'writing the sale,' customers find their selling style a bit snobbish. And because teamwork isn't encouraged, the atmosphere among staff in a store can sometimes get very tense."

Most recently, as the luxury market has cooled, Prada has begun to change. Even before releasing the annual report that showed the 28% drop in net profit, Bertelli had started handling every stage himself. In its stores, Prada now does more to encourage teamwork, asking staff not just to sell but to tell stories. Still, Prada remains the most aggressive brand in the industry, and pays its staff the most.

For all its supposed problems, and despite this year's steep decline, Prada's annual sales remain a staggering figure for the industry. During the "golden decade" of China's luxury market that has just ended, seizing opportunities sometimes paid off better than careful cultivation. Who would dare say Bertelli's strategy was wrong?

Prada is an Italian company through and through, with Italian romance and sensuality, and, like an Italian, more passion than restraint. Over its history, its results have risen and fallen as a matter of course, and the company has even come close to collapse several times.

In 2013, asked about slow growth in Greater China, Patrizio Bertelli said: "Chinese consumers haven't stopped spending. Far more of them are traveling abroad, and many choose to shop in the American and European markets." He remained interested in, and confident about, Chinese customers.

Patrizio Bertelli and Miuccia Prada

Its Chinese contract factories and extreme sales system have made Prada highly controversial in China, but that has not stopped it from being a successful luxury brand, in fashion terms and in business terms alike. The CEO's fiery temper keeps the whole company on edge, yet it gets things done.

"Compared with everything else, I think Prada is very competitive on product. Bertelli is simply obsessed with product, and so is his wife, Miuccia. Someone who used to work at Prada told me Bertelli designs products himself, and he's very proud of that," Emmanuel Hemmerle told QDaily.

Others say that although Prada puts out plenty of new products, none of them break new ground. It has been a long time since it produced a hit like a "killer bag."

"Their decisions should probably be based more on the long term. In China, they need to pay more attention to senior managers, not only when hiring them but in developing and strengthening their leadership, so they can build a strong team," Emmanuel Hemmerle said.

QDaily sent the questions raised in this article to Prada. As of publication, it had not received a reply.